Lululemon Looks to Stand Out Despite Challenges

The fashion icon brand is expected to keep up the momentum, but will the high expectations increase the risk of disappointment?

Setting a High Bar

Over the last month, analysts have been raising their estimates for Lululemon's earnings, which is seen as a sign that the Q3 result might beat consensus. The company has a history of positive surprises, even over the last several quarters and despite increasing pressure from inflation. Bullish investors point to the company benefiting from continued business momentum heading into the key holiday shopping season. Online sales have been solid, as has traffic at physical stores, which are expected to have increased sales over the prior year.

But it's also important to keep in mind the context and the market. Rivals Foot Locker and Under Armour also beat earnings in their most recent quarterly reports. However, they also cut their outlook for the remainder of the year, disappointing investors. If Lululemon manages another beat on earnings, there will likely be much focus on whether it maintains its guidance for the year. That could make the company one of the apparel and athleisure segment stand-outs.

Continuing With the Trend

Share prices in Lululemon already got a substantial push in the quarter when it was announced that the company would replace Activision on the S&P 500. But now, the company must maintain momentum to keep those gains. CFO Meghan Frank acknowledged that the growth trajectory in one of its key markets, China, has presented challenges. He also acknowledged "pockets" of increased shrink, which contributed to the decision to raise prices modestly, a sign that the company is facing resistance to passing costs on to consumers.

Another way of looking at it is that Lululemon could be a victim of its own success. After gaining almost 43% this year (compared to the S&P 500's 19%), it might be time to cash in. At least that is the view of Wells Fargo, which downgraded its rating for the company on Monday, saying that the factors that had played into recent growth had run their course. Therefore, investors might be interested to know if any new catalysts could keep the upward momentum after inventories have normalised and the company has already raised guidance on the last quarter's earnings.

Lululemon

After completing an ascending triangle at $325, Lululemon has soared near record highs, with the likelihood of reaching or breaking past the $485 increase. If bulls prevail, the long-term measured-move target could bring prices as high as $625 when adding the length of the triangle's opening range of $235 to $325. $500 and $600 are expected to be round resistance levels to claim over. Conversely, if a double-top forms or bulls fail to reach the peak, losing $420 and then $390 might open the door to the triangle's end low at $325, but unlikely $250.

Source: SpreadEx / Lululemon

Key Takeaways

Lululemon is expected to have strong earnings in Q3 and benefit from continued business momentum heading into the holiday shopping season. However, investors should be cautious as rivals have already cut their outlooks for the year. Lululemon must maintain its momentum to keep up with the gains it has already made while facing concerns about challenges in the Chinese market and increased shrinkage. Some analysts believe that Lululemon's recent growth factors may have run their course, suggesting it may be time to cash in as uncertainty about future catalysts and the sustainability of growth remain intact.